Stocks Take Breather After Recent Surge

NEW YORK ( TheStreet) -- U.S. stocks slumped Monday amid some mild profit-taking ahead of the Federal Reserve's policy meeting later this week.

The Dow Jones Industrial Average finished down less than 3 points, or 0.02%, at 13,073, trading in a tight range of less than 90 points on the day. The blue-chip index snapped a three-day winning streak, failing to follow up on Friday's nearly 2% gain, which was spurred by hopes additional monetary stimulus is on the way soon from the world's central banks.

JPMorgan was downgraded to hold at Deutsche Bank with the firm saying the risk/reward profile for the stock is less favorable with shares having rallied 19% off recent lows and that earnings expectations may be too high. The stock fell 2%.

AT&T's stock advanced less than 1% after the telecom giant boosted its stock buyback program by 300 million shares after Friday's closing bell.

The S&P 500 lost less than a point, or 0.05%, to close at 1385, while the Nasdaq Composite dropped 12 points, or 0.41%, to settle at 2946.

The weakest sectors in the broad market were capital goods, health care and consumer cyclicals. Bright spots were utilities, energy and basic materials.

U.S. stocks soared Friday after eurozone leaders stepped up their pledges to preserve the single-currency bloc. The Dow finished above 13,000 the first time since May 7.

The FTSE in London settled up 1.18% and the DAX in Germany finished up 1.27%. Hong Kong's Hang Seng index settled up 1.61% and the Nikkei in Japan closed up 0.8%. The global markets got a lift as stimulus hopes increased ahead of the Federal Reserve's policy meeting on Tuesday and Wednesday and the European Central Bank's interest rate announcement on Thursday.

"At this point in the political cycle I don't think inactivity is acceptable, so therefore I see more QE as a sign that the authorities are taking action," said Dr. Tim Morgan, global head of Research at Tullett Prebon. "When you look at the nonfarm payrolls number, the demographics size is increasing all the time. You've got to generate jobs growth a lot higher just to keep unemployment rate under control."

"I applaud what the Fed and the U.S. government have done so far ," Morgan added. "The U.S. is doing everything right, but is being let down by everything else that's happening in the world. You have the eurozone drifting -- not making decisions that need to be taken: either let the euro unravel or move towards a single budget. That's political decision. If one euro country leaves, it won't be the last -- and the problem of rest of economy slowing. Even the emerging economies are slowing."

On China, the world's second largest economy, Morgan pointed to a slowdown in electricity usage and energy consumption -- they've been running at 4% to 5% growth, below the 8% growth rate this forecast for the country this year by the International Monetary Fund.

"While a majority of economists recently polled by Reuters anticipate QE3 by year-end, few expect the Fed will take a significant measure this week," cautioned Phillip Futures analysts. "Nonetheless, the Fed could use this week's meeting to extend beyond 'late 2014' its conditional vow to maintain interest rates near zero. If Fed eases the monetary policy, this would help equities and hurt the U.S. dollar."

Meantime, investors are also looking to Europe for hopes of more central bank action after the European Central Bank President Mario Draghi pronounced that he would do "whatever it takes" to preserve the eurozone; his statements were later backed up by German Chancellor AngelaMerkel and French President François Hollande.

"Basically what the Draghi and others are doing is talking up the market," said Morgan. "The trouble is the risk that they won't deliver. You can't talk up market then fail to deliver. Once you make a bold statement, you have to deliver something of substance. One idea is the ECB could buy Spanish Italian debt; I don't think that can make difference -- the market will say we seen this done before."

The other route that's being talked about is another long-term refinancing operation, a program that worked well at the end of last year and the beginning of this year.

"If they don't do this I think there will be massive disillusionment -- the question is therefore whether the Germans are prepared to go along with something like that," said Morgan.

September crude oil futures settled down 35 cents at $89.78 a barrel. December gold futures settled up $1.30 at $1,624.00 an ounce.

The benchmark 10-year Treasury was up 15/32, lowering the yield to 1.500%. The greenback was trading up 0.24%, according to the dollar index.

In U.S. economic news, the Chicago Fed Midwest Manufacturing Index increased 1.1% in June, to a seasonally adjusted level of 94.1. Revised data show the index was down 1.4% in May.

Also, the July Texas manufacturing index from the Dallas Fed came in at negative 13.2, declining from 5.8 the prior month.

On Friday, the Labor Department is slated to release the July jobs report, which is expected to show a tepid gain of 100,000 in nonfarm payrolls after a rise of just 80,000 new workers in June, according to a survey of economists by Thomson Reuters. The unemployment rate is expected to stay at 8.2%.

On the corporate front, Shaw Group ( SHAW) agreed to be acquired by Chicago Bridge & Iron ( CBI) in a cash-and-stock transaction valued at about $3 billion. Shaw shares rose 55% while CBI's stock fell more than 14%.

HSBC ( HBC) has put aside about $2 billion to cover the cost of compliance problems related to the selling of payment protection insurance to British customers and to cover "certain law enforcement and regulatory matters" in the United States related to money-laundering controls.

The bank, Europe's biggest, reported Monday that underlying profit for the first six months of 2012 fell 3% to $10.6 billion. Shares rose 1.4%.

Also, jury selection in federal court began Monday in the patent fight between Apple ( AAPL) and Samsung.

Apple alleges that Samsung's smartphones and computer tablets are illegal knockoffs of its iPhone and iPad. Apple is seeking $2.5 billion in damages.

Meanwhile, Apple and Twitter are currently not in discussions on Apple taking a stake in the social networking site, Reuters reported, citing sources familiar with the matter. Apple gained 1.7%.

Progenics Pharmaceuticals ( PGNX) and Salix Pharmaceuticals ( SLXP) shares were plunging after they said the U.S. Food and Drug Administration asked for more data following the review of their constipation treatment.

Progenics's stock sank 50% while Salix shares tumbled 13%.

Of the 280 companies in the S&P 500 that have reported earnings to date for the second quarter, 67% have reported earnings above analyst expectations, according to a Thomson Reuters report. This is higher than the long-term average of 62% but lower than the average over the past four quarters of 68%, the report said.

A Deutsche Bank report said that year-over-year sales growth in the S&P 500 in the second quarter of 2.3% has lagged earnings per share growth of nearly 7%.